Manufacturer of Risky Drug to Sell Shares

Thursday

Jazz Pharmaceuticals has filed to sell as much as $180 million in stock in its first public offering.

Is a pharmaceutical company whose biggest-selling drug is considered as dangerous as heroin or LSD a good investment?

Jazz Pharmaceuticals — along with the private equity firm Kohlberg Kravis Roberts & Company and some of Wall Street’s most prestigious investment banks — is hoping investors think so.

Jazz, based in Palo Alto, Calif., has filed to sell as much as $180 million in stock as early as today in its first public offering. Jazz’s main product is gamma hydroxybutyrate, or GHB, a fast-acting anesthetic with a history of use in date rape and serious risks of overdose, including coma and death. Jazz sells it under the brand name Xyrem to treat narcolepsy, a serious sleep disorder.

The Drug Enforcement Administration lists GHB as a Schedule I drug, the most dangerous kind, in the same category as heroin. But the Food and Drug Administration has approved Xyrem for narcolepsy, and when dispensed by prescription Xyrem can be used legally.

Because of its risks, Xyrem can be distributed only under very strict rules. And the marketing of the drug by Jazz is the subject of a federal criminal case in Brooklyn that has already resulted in one felony guilty plea by a former Jazz employee. The narcolepsy market is small, estimated at only 120,000 patients, and sales of Xyrem were just $29 million in 2006.

As for Jazz, it lost $82 million last year and has lost almost $200 million since it was founded in 2003. Auditors have warned that the losses raise “substantial doubt about our ability to continue as a going concern,” according to the offering prospectus Jazz filed with the Securities and Exchange Commission.

In plain English, Jazz — which had $67 million in cash as of March 31 — is running out of money. And if it does not get more, it could go broke as early as the end of this year.

Jazz is hoping to solve that problem, at least temporarily, by selling as much as 6.9 million shares to the public at $24 to $26 a share. The offering, which values Jazz at about $600 million, could be completed as early as this morning, with shares sold to institutional or individual buyers who can resell them when Jazz begins trading later in the day. Morgan Stanley, Lehman Brothers (which is also an investor in Jazz) and Credit Suisse are leading the deal.

Aside from Jazz itself, the biggest winner in the public offering would be Kohlberg Kravis and other private equity firms. Since 2003, they have sunk $265 million into Jazz. If the company cannot go public, they will have to choose between putting more money up or potentially losing their entire investments.

Matthew K. Fust, Jazz’s chief financial officer, declined to comment about the offering or Jazz. A spokeswoman for Kohlberg said the firm could not comment because the offering is imminent. Securities and Exchange Commission rules discourage companies from discussing their prospects in advance of a public offering.

Jazz hopes to expand Xyrem’s potential market vastly by winning approval from the F.D.A. to promote it for fibromyalgia, a vague and poorly understood pain disorder with symptoms that are often treated with antidepressants. Jazz is conducting two late-stage clinical trials to prove that Xyrem reduces the pain of fibromyalgia, with results expected in the one trial in the second half of 2008.

In an earlier trial, about 30 percent of the people who took Xyrem reported improvement in their fibromyalgia symptoms, compared with 13 percent on a placebo. Whether that figure will be enough to persuade the F.D.A. to approve Xyrem — whose label warns that abuse of GHB can cause “seizure, respiratory depression and profound decreases in level of consciousness” — is not clear.

Much bigger drug companies, including Pfizer and Forest Laboratories, are also researching fibromyalgia treatments and have medicines further along in development.

Jazz, meanwhile, is still under a cloud in a criminal case in Brooklyn involving the way it promoted Xyrem to doctors. Last year, federal prosecutors charged Dr. Peter Gleason, a psychiatrist, with working illegally with Jazz to encourage doctors to use Xyrem to treat fibromyalgia and other diseases for which Xyrem has not been approved, so-called off-label uses.

The case has raised debate about free speech and how tightly the government may regulate discussions by doctors with one another. Under F.D.A. rules, doctors may prescribe drugs for any condition they see fit, but pharmaceutical companies are not allowed to promote drugs for off-label uses.

Dr. Gleason is fighting the charges. But in March, David Tucker, a former sales manager for Jazz who worked with Dr. Gleason, pleaded guilty to a single felony count of introducing a misbranded drug into interstate commerce. Mr. Tucker has not been sentenced, but the charge carries a maximum sentence of up to three years in prison, according to Bruce Maloy, Mr. Tucker’s lawyer.

Geoffrey Kaiser, the prosecutor handling the case, said he could not comment.

In its prospectus, Jazz says it is close to settling the case by pleading guilty to the same felony charge as Mr. Tucker and paying $20.5 million in civil and criminal fines and restitution.

With all the clouds over Xyrem, potential investors in Jazz may be pleased to know that it does sell another drug, Antizol, used to treat people who have been poisoned by antifreeze. Unfortunately — or fortunately, perhaps — Antizol’s market is even smaller than Xyrem’s. Antizol had sales of $2.6 million in the first three months of 2007.

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